Good day and welcome to the New Mountain Finance Corporation Fourth Quarter 2019 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Rob Hamwee, Chief Executive Officer of New Mountain Finance Corporation. Please go ahead.

Thank you and good morning, everyone, and welcome to New Mountain Finance Corporation’s Fourth Quarter Earnings Call for 2019. On the line with me here today are John Kline, President and COO of NMFC; and Shiraz Kajee, CFO of NMFC. Our Chairman, Steve Klinsky is unable to join the call today, but will rejoin us on future calls. I’d like to by asking Shiraz to make some important statements regarding today’s call.

Thanks, Rob. Good morning, everyone. Before we get into the presentation, I would like to advise everyone that today’s call and webcast are being recorded. Please note that they are a property of New Mountain Finance Corporation and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our February 26 earnings press release. I would also like to call your attention to the customary Safe Harbor disclosure in our press release and on Page 2 of the slide presentation regarding forward-looking statements. Today’s conference call and webcast may include forward-looking statements and projections, and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from those statements and projections. We do not undertake to update our forward-looking statements or projections unless required to by law. To obtain copies of our latest SEC filings and to access the slide presentation that we will be referencing throughout this call, please visit our website at www.newmountainfinance.com. At this time, I’d like to turn the call back over to Rob Hamwee, NMFC’s CEO, who will give some highlights beginning on Page 4 of the slide presentation. Rob?

Thanks, Shiraz. Let me start by presenting the highlights of another solid quarter for New Mountain Finance. New Mountain Finance’s adjusted net investment income for the quarter ended December 31, 2019, was $0.36 per share above the high end of our guidance of $0.33 to $0.35 per share and more than covering our quarterly dividend of $0.34 per share. New Mountain Finance’s book value was down $0.09 to $13.26 per share reflecting generally stable financial market conditions and limited portfolio of company valuation changes. We’re also able to announce our regular dividend, which for this 32nd straight quarter, will again, be $0.34 per share and annualized yield of approximately 9.6% based on last Friday’s close. The company had another strong quarter of net deal generation investing $286 million in gross origination versus moderate repayments of $74 million. This continued balance sheet growth was in part funded by our October equity issuance and keeps us fully levered in our target range inclusive of some early Q1 repayments. Credit quality remains generally strong, although we did add one new historically troubled name to non-accrual this quarter, our first new non-accrual in a year and a half. I and other members of New Mountain continue to be very large owners of our stock, with aggregate ownership of 10.7 million shares. Finally, the broader New Mountain platform that supports NMFC continues to grow, with over $20 billion of assets under management and approximately 160 team members. In summary, we are pleased with NMFC’s continued performance and progress overall. Before diving into the details of the quarter, as always, I’d like to give everyone a brief review of NMFC and our strategy. As outlined on Page 6 of our presentation, NMFC is externally managed by New Mountain Capital, a leading private equity firm. Since the…

Thanks, Rob. As outlined on Page 14, direct lending deal flow in our core sectors was strong in Q4 and for the year as a whole. Q1 deal flow has been somewhat weaker due to the normal seasonal slowness associated with the beginning of the year. We have seen some recent pressure on new issued loan spreads due to what we believe is a temporary supply and demand imbalance, which shouldn’t moderate as sponsors become more active in the coming months. We continue to see high-quality businesses trade at historically high multiples, often in the range of 15 times to 20 times EBITDA. Additionally, there continues to be a very strong trend in the direct lending market towards larger club deals. Over the last six months, we have seen multiple club financings over $1 billion, which we believe is a very positive trend for our business. While we acknowledge uncertainty around the coronavirus; looking forward, we expect transaction flow to improve in the coming months and we remained well positioned to select, underwrite and access the best deals available in the marketplace. Turning to page 15. Given our current asset liability mix, LIBOR has been a headwind in our business. in 2019, the market experienced a 90 basis point decline in three months LIBOR with an additional 20 basis point decline since the beginning of the year. While volatile, the forward LIBOR curve currently suggests that three month LIBOR could decline by an additional 50 basis points to 75 basis points in the coming quarters. Based on the sensitivity shown on page 15 if this does occur, declining LIBOR would represent a $0.015 to $0.02 per quarter earnings headwind. However, we continue to believe that if base rates migrate materially lower due to heightened risks in the economy, we will…

Thank you, John. For more details on our financial results in today’s commentary, please refer to the form 10-K that was filed last evening with the SEC. Now, I’d like to turn your attention to Slide 24. the portfolio had approximately $3.2 billion in investments at fair value at December 31, 2019 and total assets of $3.3 billion, with total liabilities of $2 billion, of which total statutory debt outstanding was $1.7 billion excluding $225 million of drawn SBA-guaranteed debentures. Net asset value of $1.3 billion or $13.26 per share was down $0.09 from the prior quarter. At December 31, our statutory debt-to-equity ratio was 1.35 to 1. it is important to note that due to previously anticipated repayments received this year as of today, our statutory leverage is 1.28 to 1 putting us within our target range. On Slide 25, we show our historical leverage ratios, step up and leverage over the past seven quarters is in line with our current target statutory debt-to-equity ratio. on the slide, we also show our historical NAV adjusted for the cumulative impact of special dividends, which shows the stability of our book value since our IPO. On Slide 26, we show our quarterly income statement results. We believe that our adjusted NII is the most appropriate measure of our quarterly performance. This slide highlights that while realized and unrealized gains and losses can be volatile below the line. We continue to generate stable net investment income above the line. Focusing on the quarter ended December 31, 2019, we earned total investment income of $77.9 million, an increase of $5.3 million from the prior quarter, primarily due to high interest income from the increased asset base. Total net expenses were approximately $43.5 million, a $2.1 million increase from the prior quarter to the…

Thanks, Shiraz. It continues to remain our intention is to consistently pay the $0.34 per share on a quarterly basis for future quarters, so long as NII covers the dividend in line with our current expectations. In closing, I would just like to say that we continue to be pleased with our performance to-date. Most importantly, from a credit perspective, our portfolio overall continues to be quite healthy. Once again, we’d like to thank you for your support and interest. and at this point, turn things back to the operator to begin Q&A. operator?

[Operator Instructions] The first question comes from Owen Lau of Oppenheimer. Please go ahead.

Good morning and thank you for taking my questions.

Yes.

So, for UniTek Global Services, it seems to us that you marked down the first lien debt to 89% and preferred to 86%. So, the spread was about 3%. Maybe, could you please explain why we don’t see a wider spread between the two? Thank you.

Yes. I mean, I think a lot of it has to do with the underlying yields on both the different tranches of debt. So, the junior tranche has a much wider yield. So, when we marked UniTek, we did create – if you go down the capital structure, the implied yield gets wider as it should. And so the difference really is just the coupons on the different pieces of debt.

Okay. Got it. And then another question you may still be a little bit early here, but do you see any early sign of impact from coronavirus fear on your portfolio complete? And how would you assess in Medicaid the potential risk here? Thank you very much.

Yes. Listen, it’s obviously something we’ve been thinking a lot about in the last few days. And you’re right; it’s too early to see anything in reported numbers or even in kind of flash KPIs. But when we think prospectively, if the coronavirus does have the impact, that certain folks think it might have and that markets are impounding that it might have. We do believe we’re very well positioned on a relative basis. We don’t have anything in the portfolio, that should be first order or even second order impact of coronavirus, right? We don’t have travel and leisure or we don’t have manufacturing supply chain issues, logistics, ships out at sea. So, we continue to believe the portfolio is very defensively constructed when you think about things like enterprise software, U.S. healthcare, some of the technology-enabled business services that make up the vast majority of our portfolio, those things should be directly impacted by coronavirus. And nor should they be directly impacted if coronavirus does in fact lead to an economic downturn, right. We’ve always said that we are atypically focused and if this is the catalyst that thesis we’ll find out, we feel quite good about our positioning in light of a turn to that.

All right. That’s it for me. Thank you very much.

Yes. Thank you.

[Operator Instructions] The next question comes from Finian O’Shea of Wells Fargo. Please go ahead. Finian O’Shea: Hi guys. Good morning. How are you? Just the first question on the non-accrual. Can you remind us of the – why the nature of the collateralized resell agreement? I’m sure it’s a simple answer there. More importantly, does this or how much does this probably weaker structure on the underlying play into your recovery scenario?

Yes. it really doesn’t play into the recovery scenario. We have a crystallized claim in there – in the court restructuring. So, we are well positioned there and there’s very little secure debt in the state ahead of our claim, but that the significant majority of all that secure debt has been paid off based on cash proceeds received. So, we are effectively sitting up at the top of the structure right now, a little bit ahead of us, but literally, single-digit millions. So, we’re in line to receive proceeds in the coming year as they come in here to begin working the claim down. Finian O’Shea: Okay. That partially answers my follow on. I was going to ask that it had been in court for at least there’s news out there from earlier last year. But I was going to ask you what was the non-accrual itself based on any – was this just the development of your ongoing assessment evaluation or was there – is there sort of a development in courts that may soon emerge that’s telling us where you’ll be? You kind of just answered that proceeds will start trickling in over the year. So, I assume what we’re at somewhat of a conclusion period.

I think inclusion is too strong. It’s probably – it’s Winston Churchill would say, it’s maybe, not the beginning of the end, but the end of the beginning. So, it’s still a multiyear process to play through and it moves in fits and starts, because there’s obviously a major criminal investigation around this whole procedure that obviously takes precedent over the civil litigation side. So, I don’t want to get too precise around timing, but we’re certainly making good progress and expect to have updates in the quarters ahead to help further refine. Finian O’Shea: Okay. That’s fair enough. Just a couple on the market. I think John mentioned the outlook for improving private equity deal flow. This – I’ve heard at least a couple managers with opposing views and there’s kind of concerns in the context of high multiples and late cycle concerns. So, I guess what would you say or how would you support the view of rebounding a buyout activity?

Yes. So I mean, I think a couple of factors, right? And then I’m going to put coronavirus to the side, right? And if that continues to explode, that has its own impact and we’re not trying to get that. So, we’ve got to put that to the side for a moment. But in an ordinary course market, I think the view is supported by a, we’re, we’re in that market every day as a private equity – major private equity sponsored buyer, seller of companies. So, we have a pretty well-informed view of the pipeline. And is it maybe, different folks, who are maybe, different industries. As I’ve said in the past, the market has sort of moved in our direction. There’s increasing flow in the areas that we focus on, but maybe, just a mix issue there. And then I think the other sort of macro thing that gives one confidence in the view is just the formation of capital and private equity that’s – that is really increased dramatically in the last couple of years, continues to increase bigger funds, more funds. And in the history of private equity, very, very, very rarely has anyone ever given back money. And as we know, there’s finite timelines to put those capital to work. So, for all those reasons, I think we have that competence again, coronavirus off to the side. Finian O’Shea: Yes. And then one final sort of related and perhaps more difficult question on spreads, so I think you had – one of you commented on a little bit of confidence that there’d spread-widening as well in the context of the forward LIBOR curve. But LIBOR has been sliding down for at least a year. So, I think it’s fair to say we’ve seen just a lot of return compression at least on mid-to-higher quality credits. So, would you – you’ve been indirect lending for awhile. Are you saying that the supply and demand is sort of balancing out here and things should level off?

So I mean, just factually, right. Last year, we saw, like you said, LIBOR compression over the course of the year as John highlighted, we did see modest spreads expansion over the course of last year. And that came to an abrupt end in January, where we’ve seen obviously again, pre-corona a meaningful rally in credit and therefore, compression in spread. So, for maybe, six weeks, Jan 1 through Feb 15, we did have sort of what is typically anomalous, which is both ongoing LIBOR compression and spread compression that anything can happen, but long-term that has never occurred. And there’s always seems to be some catalysts and maybe, now it’s coronavirus, but obviously, spreads are widening again, LIBOR continues to fall. So that’s why we – our experience, like you say, we’ve been accessed a long time is that for the long – in the long run, those two things don’t move – those two things are inversely correlated. And that was the case over 2019 and we’re sort of seeing it again, here after kind of six weeks of anomalous behavior.

The only thing I’d add is that when you think about spreads going down in treasuries to record low levels that clearly signals a risk aversion in the market. And so it’s just impossible for us to think that if there’s risk aversion in the marketplace generally, that spreads are going to go tighter. That just doesn’t make sense to us. So, risk aversion is going to be in wider spreads and that’s why we’re optimistic about wider spreads in the current environment. Finian O’Shea: Very well. That’s all from me and thank you for the color.

Yes, thank you.

The next question comes from Ryan Lynch of KBW. Please go ahead.

Hey, Ryan.

Hey, Rob. Good morning. First question has to do with your leverage. You had mentioned you guys are – now have access to additional $150 million of SBA debentures. Obviously, those don’t count towards your regulatory or statutory leverage on your balance sheet. And that’s where you guys usually – that’s where you set your leverage target at. Do you though, however, that’s real leverage that you guys are putting on your balance sheet? Do you guys take into consideration that the total debt-to-equity at all, does that play any sort of component of how to operate your business? Or are you guys just pretty much solely focused on that regulatory or statutory leverage ratio?

Yes. No, I mean it’s a good question. We do look at both. We prioritize the regulatory versus the absolute number. But on Page 25, we track both and haven’t been radical divergence, nor do we expect that and even as we ramp up beyond on SBA as the business has continued to grow, I wouldn’t expect the Delta between regulatory and an absolute leverage to be radically different than it’s been in recent quarters. There may be some slight fluctuations, but I wouldn’t expect those fluctuations to be overly material.

Okay. It’s helpful. And then kind of following up on your comments regarding LIBOR, LIBOR has come down a lot. It looks like it’s going to continue to trend lower going forward. You bet that in your comments, given your guys leverage profile and things like that, do you guys think – do you guys can support the dividend at this level and you guys are clearly done a fantastic job historically covered it. I’m just curious, is there any appetite to potentially shift if it comes to this shift anymore of your portfolio to more non-first lien assets. As I look at Slide 13, you guys have done a fantastic job of reducing those non-first lien assets as you guys have grown leverage as you talked about. But given the pretty dramatic move that we’ve had in LIBOR, it looks like it’s going to continue. Is there appetite if necessary to shift into more of those non-first lien assets?

Yes. I think it’s another good question. I think, we’ve obviously, like you said, moved a lot and we used to be, I think at our – at our peak, we were under 50% senior. We’re now 60% – high 60% senior. Could it come down to mid-60%? But it’s not going to go back to 50/50. I can tell you that. But a few percentage points around the edges, but only – only if we find from the bottoms-up securities that we – that fit with our kind of zero-loss underwriting standards. So, we’re going to – no matter what we do, we’re going to maintain the absolute discipline around underwriting. We’re not going to solve to a portfolio level yield and at the expense of taking on incremental risk at the asset level.

Okay. That makes sense. And then I have one more just kind of a higher level question on the coronavirus. I’m not going to ask, what do you think the impacts are on your portfolio companies? Because I think it’s just far too early and it’s far too fluid of a situation with so many unknowns and how this plays out? But what I do want to know is, what are the processes and steps that New Mountain takes us a platform to both monitor the global impacts of the coronavirus are having. and then specifically, how do you guys monitor that at your underlying borrowers, given that, as you’ve mentioned, but it’s not going to show up in any data for a while now. And it’s very fluid. So, how are you actually trying to monitor that though, with your specific borrowers?

Yes. So, I mean, at the platform level, we obviously it’s – it’s a critical issue. I do think, we actually have, I mean, we’ve had some internal conversations already. We actually have some pretty good insights, because of our very large footprint in healthcare. So, we have both. None of us around this table are epidemiologists. We actually have access to some of the very best minds in the space and as both, as just human beings and as investors, we care a lot about this and we’re, I think, able to track it as well as anyone. And like you said, there’s incredible uncertainty even when you talk to the best epidemiologist in the world, et cetera. So, I think from a platform level, we can stay quite well-informed. Now, taking that a layer down from the credit business into our borrowers is hard. I mean, right, we’re entitled to the information that we’re entitled to pursuant to our credit agreements. Now, most of our borrowers we have a real dialogue with and we are trying to ramp up the interaction with management, with the sponsors to have a qualitative more real-time overview as opposed to the backwards looking numbers. So, we’re doing everything in our power, but I don’t want to oversell what that can ultimately allow us to do. I’d take honestly most comfort – we’ve done this, as we’ve gone through our individual borrowers. If you look at them line by line and you say is this an entity that is legacy business model that is likely to be impacted assuming, eight, maybe, not the worst case, but a bad case of coronavirus and the answer for the most part is no. So, that is what gives me, I think in the team here, the most comfort.

Okay, that’s a good color and helpful. Those are all my questions. I appreciate the time today.

Great, thank you.

The next question comes from David Miyazaki of Confluence Investment Management. Please go ahead.

Hey, David.

Hi, good morning. Good morning. Thank you for taking my question. I didn’t want to let slip the – I think that investors have kind of expect you guys to handle things properly and treat shareholders the right way, but reversing the pic and your incentive income is a thoughtful thing for shareholders and even though you guys do that kind of thing all the time, I think it’s still something that should be applauded. So, thank you for doing that.

Yes. Thank you. Not a hard to do.

Well, we appreciate it. And I don’t want to sort of like beat a dead horse here too much, but kind of following up a little bit on what Ryan was talking about. A couple of things, the response in the public equity and debt markets to coronavirus has been so [indiscernible] in the middle market things tend to be a little lagged. But just probably, really early to see this yet, but kind of thinking through, for example, if you were to issue debt in the public markets, the spread would be wider. So, are you seeing any body language from banks and how they’re viewing credit facilities or how they might be viewing advanced rates? And then on the other side of things, I wonder if you could share some perspective that you have from the private equity side and it’s probably, I would think that that underwriters and investors on the private equity side would be considering the exposure to corona, and is it creating some pause in transactions? Does it have any impact on the way that valuations or leverage might be applied to private equity deals?

Yes. So, on the second part of that, on the private equity side and in the capital market, again, it’s moving so quickly and we’ve seen such a radical reaction if you, have you measure it, whether it’s the 10-year move, it’s, it’s looking at the mix, looking at 10% down in five days in the equity market. I think everyone’s reevaluating everything. So, the private equity typically moves in a timeframe of months. So, it’s – I think people are just kind of seeing day to day how things play out and it very well could impact valuations. It could impact leveragability, quantum of debt and rates on debt for sure, right. As I mean, John said, like, the risk appetites in the public markets decrease that is going to be reflected in the private markets for certain. But people are going to see how things develop. It’s not going to get whipsawed on a day-to-day basis. So, I think we’ll know a lot more in a couple of weeks as whether this is sort of a transient thing or whether this is a long-haul thing. In terms of our position as a borrower, we’re fortunate that based on both terming out the debt and having advanced rates that are not subject to market sentiment or even underlying prices of our assets, there’s really no changes nor we expect to see any changes. When we think about incurring future debt down the road, we’ll have to see. But we’re not looking to tap into that market anytime in the near to medium term other than opportunistically, if things got better and we could improve our foreign cost, of course. So, we’re really not exposed to that. But again, like any asset class, I would expect that there will be a reaction to some degree there.

All right, great. Thank you very much for that color.

Yes, for sure, David. Thank you.

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Rob Hamwee for any closing remarks.

Great. Well, thanks everyone for the interest today. We appreciate it. We obviously, will be monitoring the markets very closely. So, it’s kind of a battle of time right now and we’ll be looking forward to updating folks in the weeks to months ahead. So, thank you and have a great day. Bye-bye.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.